Thursday, October 23, 2008


(Week 11 - Thursday, Oct. 23)

During a workshop I conducted in Wisconsin, one participant posed a question about a personal financial dilemma in which she felt morally torn between the possibility of borrowing money to purchase a 20 acre parcel of land that was contiguous to a like-sized parcel she was living on, or foregoing the opportunity and thereby obviating the need to go to the bank. She had what she felt were a number of moral reasons for wanting to make the deal, but wasn't sure that such factors adequately justified taking on more "debt". Clearly in this case, to borrow and buy would not be a justification-by-necessity act, but she felt that it could be a humanly creative choice. She wanted my advice on whether she should borrow the money and make the purchase, or not. It was a question for which I could not give a direct answer, but could instead offer conversation that might help her in her determination of what course to take.

I suggested that in making her decision, it might be wisest to ignore the monetary implications with respect to whether or not it would cause more "debt" to come into existence. This seemed to her like a strange response, given that I had just delivered a long dissertation about how borrowing money from a bank causes more compounding "debt" to enter the system, which winds up being carried by the society as a whole on a never-ending basis into the future even after one's loan from the bank is technically paid off. This happens because the proceeds from the "interest" payments are typically converted into more "debt" by "investors" who have purchased the right to be the recipients of these payments. They "recycle" these funds back into circulation by loaning them out at "interest", this time without even the benefit of newly created bank money entering the money supply (see Col. #5, "Where Does Our Money Go?").

How, then, does ignoring the monetary implications of whichever course is taken make sense? It is because, monetarily speaking, the "to borrow, or not to borrow" dilemma is really a Hobson's choice (one with two equally problematic alternatives).

On the one hand, if one goes ahead and borrows the money, whatever benefit flows from the purchase that is financed by the loan is compromised by the burden to the individual and society of the "debt" thereby taken on. It should be noted that if the borrowing was done through a bank, the additional money created does continue to circulate through the money supply after the initial outlay, and this, in turn, does provide to the economy always-needed (but never enough) additional circulating medium.

On the other hand, if one does not take out the loan the "debt" burden is averted, but so is the benefit that might have transpired through whatever the money would have paid for. It should be noted that not borrowing also does not cause additional circulating medium to enter the money supply, and so in effect occasions a contraction of the economy relative to the level of activity it could have supported had the loan been made.

There are other nuances to this choice that could be traced out at length, but the upshot is, I believe, that considered as merely a monetary question, the decision "to borrow, or not to borrow" is, as an economist might say, a "wash" (a choice which has diametrically different, but equally offsetting, outcomes). The reasonable course, then, is to make the decision on the basis of the human merits of the case, and let whether or not the trip to the bank is made follow.

In the case of the lady at the workshop who wanted to know whether she should borrow more money to buy the adjacent land, the decision would presumably be based on a comprehensive consideration of the actual physical and human factors involved. To be sure, such deliberations can run deep, and may even extend in the minds of many to spiritual considerations which are wholly out of the domain of calculation, but whatever the case the question is by its nature uniquely personal, and precisely fitted to the actual people, circumstances and unit of time in which it takes place.

This is not to say that the human cost of carrying a resultant "debt" burden is necessarily not a factor that should be weighed in, but the decision in principle about whether to borrow, or not, is another matter.

The long and short of my advice (if I might presume to offer such) is, when making any economic decision, to follow as much as possible the best option available with respect to benefiting life, and let the finances take their course. Ultimately, the monetary system in its current configuration is not sustainable whether people borrow at a high or low rate. The important point is to not let life suffer anymore than it has to due to the pernicious workings of the system in the knowledge that any determination concerning whether or not to take on "debt" arrived at truly will in the short run avail life, and in the long run buy time for people to come to their senses and remedy the flawed foundation upon which the system is founded. That, in my view, is an optimum course of action, however it might play out in detail in any particular case.

The example we have examined here pertains to the finances of one particular person, but how does that relate to the to-borrow-or-not-to-borrow question for society as a whole? That is a question I will take up in tomorrow's column.

Richard Kotlarz

The complete set of columns from this series is posted at the following websites.